China opens forex market

A flurry of overseas banks have been approved by the People’s Bank of China (PBOC) to conduct foreign currency business with Chinese corporate and individual customers – the first tangible deregulation of the financial market since China’s signing of the World Trade Agreement (WTO) last November. The move will also allow foreign banks to offer a limited foreign currency derivatives service directly to local customers for the first time, subject to central bank authorisation.

Citibank received approval to offer foreign currency services at its Shanghai branch on March 19, making it the first wholly owned foreign bank to be approved by the PBOC. It was followed by Hong Kong’s Bank of East Asia, which received approval for three branches in Shanghai, Guangzhou and Zhuhai, with authorisation for four additional branches expected within weeks.

Earlier in March, Xiamen International Bank – a sino-foreign joint venture, with 10% stakes by Asian Development Bank and Japan’s Shinsei Bank – became the first foreign invested institution to win approval for its Xiamen branch.
Following the signing of the WTO agreement, foreign banks were technically allowed to offer foreign currency services to Chinese corporates and individuals immediately. In reality, overseas institutions had to wait until February before new capital regulations were published by the PBOC, stipulating an increase in capital of RMB100 million ($12 million) per branch, before applying for approval.

Authorised foreign banks will now be able to take foreign currency deposits from and offer foreign currency loans to domestic Chinese customers. Banks can also technically offer foreign currency derivatives products, such as US dollar interest rate swaps, but require separate approval from the central bank and the State Administration of Foreign Exchange Control (SAFE) for each deal.

Overseas institutions will be able to offer renminbi (RMB) services to Chinese institutional customers from 2003 and Chinese individuals from 2006 (subject to another increase in capital levels by RMB100 million per branch for each business line). Before the signing of the WTO, foreign banks could only offer foreign currency services to foreign invested enterprises, and a limited RMB service to foreign firms in Shanghai and Beijing.

More approvals are expected over the coming weeks, as foreign banks attempt to chip into the estimated $80 billion in foreign currency held by Chinese customers. However, there is concern that the required level of capital is too conservative, and may mean some banks are unable to participate in the market. “The increased capital will undoubtedly increase our country exposure and, in turn, increase our risks, as well as the cost of capital,” comments one Shanghai-based banker who asked not to be named. “Not every bank can afford this.”

However, Stanley Wong, chief executive for China at Standard Chartered in Shanghai, believes the vast sums of foreign currency held by local customers should make the business profitable – provided banks manage to acquire sufficient market share. “It largely depends on how much market share you can get with maybe only one or two branches,” he says. “It’s very difficult to estimate.”